Jerry’s in a Pickle With Investors, May Be Sold

Jerry’s Famous Deli, the Studio City-based restaurant chain that draws pastrami-loving celebrities from across Southern California, may be sold or merged with another company as frustrated executives seek ways to prop up a share price that has dropped 92% in less than three years.

Last week, the company announced that its board of directors plans to hire a financial advisor to evaluate the chain’s “strategic alternatives.”

From a high of $10.37 in August 1996, 10 months after the company went public, the stock has fallen to its current level of 81 cents, down 6 cents Monday in Nasdaq trading, despite fairly steady growth in revenue. It hit a 52-week low of 59 cents on Nov. 19.

The board is seeking alternatives that may see the storied eatery put on the auction block.

“We’re looking into all possible avenues of maximizing shareholder value,” Christina Sterling, Jerry’s chief financial officer, said Monday.

Asked if a sale of the company is a possibility, she said: “It’s possible, if that’s what makes the most sense. Or it’s possible we would merge, or it’s possible that we would buy something.

“We’re really just looking into what makes the most sense for the company.”

Sterling stressed that the chain, which has nine delis in the Southland and a gourmet grocery and two restaurants in Florida, is not in merger or acquisition talks. She said she expects the company to settle on a financial consultant this week.

She said there is no set time frame for action, but some change could be announced within a few months--not a moment too soon for shareholders who’ve seen the stock drop 65% in the last year.

“We’re very frustrated with the stock where it’s trading,” said Sterling, noting that the book value--the theoretical net worth based on assets minus liabilities--is about $1.80 per diluted share.

“We intend to do whatever we can to change that.”

Robert A. DiMinico, who formerly headed up Boston Group, which underwrote Jerry’s initial public offering in October 1995, noted that the company has traditionally shown impressive growth in revenue.

It’s the earnings that are in the tank.

“When the Boston Group took the company public, Jerry’s Deli was on a pattern of steady revenue growth,” said DiMinico, who now works for New York-based National Securities.

“However, the company is experiencing difficulty in achieving net income growth.”

He said he believes the stock has been depressed by short sellers, traders who borrow stocks and sell them in the hope of buying them back at lower prices.

“That has driven the price down to the current levels,” DiMinico said.

DiMinico said he believes the stock is undervalued and is “probably worth as least $3 . . . which explains why [Chief Executive Isaac] Starkman would explore alternatives.”

In the third quarter ended Sept. 30, Jerry’s reported net income of $10,000, or break-even, compared with $104,000, or 1 cent per share, for the same period a year earlier. Third-quarter revenue rose 25% to $17.2 million from $14 million in the year-ago quarter.

While shrinking share value may be the company’s biggest worry, it’s not the only one.

Traffic at some stores, including the flagship Studio City outlet, has been waning, and the chain--known for being open 24 hours--has cut hours of operation at four of its nine Southern California restaurants.

Some longtime Jerry’s patrons speculated that part of the chain’s dip in popularity stems from a well-publicized case of tainted turkey.

Earlier this year, 19 people, including cast members from the TV series “Frasier,” were awarded $431,000 by a Superior Court jury that concluded that the Studio City restaurant sent them turkey takeout contaminated with salmonella.

Founded by Starkman and his partner, Jerry Seidman--the chain’s namesake, who left in 1984--the company tapped bank loans during its early years to finance the restaurants. A $9-million cash infusion from the IPO led to more openings.

The company has since curtailed what had been a fairly aggressive expansion policy, opening up no new Jerry’s outlets in 1998--though it did expand its Florida operations. It has said it has no plans to open more stores in 1999.

“Our plans for 1999, we’re holding back to see what’s going to come out of our consultant’s studies,” Sterling said.

She said the company already has enacted a number of suggestions made by an outside consultant to improve operations at existing stores.

“We’ve revamped our training program with an emphasis on customer service,” she said. “We’re looking at our menu. We’re doing all kinds of things internally.

“It may be that what turns out to be best is just to wait 90 days and see.”